Framing the budget with little in the pocket

With just over a fortnight to go an annual piece of Dáil theatre is already taking shape. Budget day used to be shrouded in secrecy; not any longer. 

For the last few years, most of the budgetary detail has been in the public domain and this year is unlikely to be any different.

Part of the reason for that is managing expectations on the part of the Government, or perhaps more accurately it’s about managing disappointment.

Prior to the downturn in 2007-2008, the minister for finance might have in excess of €1bn to spend in tax reductions.

With resources of that order to distribute, a minister could make a real difference to people’s pay packets. That hasn’t been the case in recent years, but this year the country turned something of a corner in that the tax collection returned to around their previous 2007 high levels.

Despite the uplift in tax revenues, the country still has to borrow to meet its spending commitments. A big part of the reason for that is the cost of paying interest on the national debt. Borrowing capacity is curtailed by EU fiscal rules and this limits the so-called fiscal space — the amount of money at the minister’s disposal for additional spending and tax cuts.

This year all the signals suggest there will be somewhere between €200m and €300m available for tax cuts in 2018.

But because there are 2.5m income earners, that amount is not going to go very far.

The recurring problem for any minister for finance is that any tax relief costs a fortune to implement. If the available amount for 2018 were to be divided equally among all income earners, we could all expect an additional €2 a week from the budget.

To make any meaningful change to the fundamentals of the tax system — say for example a 1 percentage point reduction in the 20% rate to 19% — €500m must be set aside. That kind of sum is not available in 2018 without raising taxes elsewhere.

There is, of course, nothing to stop the minister doing just that — raising other taxes to fund making income tax and USC cuts. For instance, over half of the goods and services bought by consumers attract Vat at the 23% rate.

A one percentage point increase in the Vat rate to 24% would bring in €411m. By adding 10c to the price of a litre of diesel, the exchequer would benefit to the tune of €250m. An extra 10c cent on a litre of petrol drags another €100m into the Government coffers.

These kinds of increases hit voter pockets, which makes it more likely that the minister might turn his attention to the corporate sector if he is looking to raise more taxes this year.

Given that the amount available for tax cuts in 2018 is relatively small in overall terms, should the minister not make any income tax cuts at all and instead apply the money towards public services, housing, healthcare roads and the like?

Some analysts think so — the Nevin Economic Research Institute’s quarterly report last week makes a claim that the argument for aggregate tax cuts in the next budget is very weak.

While this is true up to a point, it would be wrong not to offer any tax relief particularly to people on modest wages.

Taxpayers are citizens too.

Brian Keegan is director of public policy and tax at Chartered Accountants Ireland.

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